Mar­kets get­ting real as fi­nan­cial driv­ers re­cede

The Pak Banker - - OPINION - An­drew Shouler

Ner­vous­ness has de­scended upon global mar­kets, and among lo­cal bourses, sig­nalling a switch­ing of col­lec­tive at­ten­tion from cen­tral bank be­hav­iour to un­der­ly­ing eco­nomic con­di­tions. What an­a­lysts call an­i­mal spir­its have re­ceived some­thing of a knock.

For some time now, run­ning into years, in­vestors and traders have taken their cue mainly from the per­sis­tence of ul­tra-easy money set­tings, which have then been val­i­dated by the per­for­mance of the as­sets pur­chased, re­gard­less of com­par­a­tively dis­ap­point­ing world re­cov­ery. Now it seems that the on­go­ing re­sis­tance to nor­mal­is­ing mon­e­tary pol­icy, even marginally, is gen­er­at­ing in­creas­ing con­cern, re­flect­ing im­por­tantly the fail­ure of GDP growth to be­come prospec­tively self-sus­tain­ing. China's sharp slow­down and the latest as­so­ci­ated fall­out may now be enough to keep the US Fed­eral Re­serve from tip­ping into tight­en­ing mode. Bad eco­nomic news could be­lat­edly be trans­lat­ing into bad fi­nan­cial news.

That would stand in con­trast to much of the pe­riod post-cri­sis, wherein poor data promised fur­ther liq­uid­ity largesse that would un­err­ingly find its way into ap­pre­ci­at­ing stocks and bonds, in the ab­sence of a gen­uine growth im­pe­tus that would spark in­fla­tion. What hasn't changed, though, is that in­ter­na­tional trends are be­com­ing fur­ther, steadily in­ter­twined, par­tic­u­larly in re­spect of the dom­i­nance of the US and now China as eco­nomic driv­ers and pol­icy bench­marks for the rest of the world.

The de­cline of GCC mar­kets in line with oil's fur­ther eas­ing only re­in­forces the point. As busi­ness glob­ally will soon turn its mind back to work fol­low­ing the sum­mer sea­son, now also Europe and the Greek sit­u­a­tion will re­fresh un­cer­tain­ties. Clearly, too, the most re­cent de­vel­op­ments in the Gulf as to fis­cal man­age­ment and re­form - namely the pro­posed in­tro­duc­tion of sales tax to com­pen­sate for di­min­ished ex­port re­ceipts - re­late to the same un­der­ly­ing re­al­ity.

Econ­o­mists view­ing the re­gion are dust­ing off their jar­gon for another dip in ac­tiv­ity as the im­pli­ca­tions of both the ex­ter­nal pres­sures and in­ter­nal re­sponses take ef­fect, re­sort­ing once again to ref­er­enc­ing 'head­winds', but also the cush­ion of ac­cu­mu­lated fi­nan­cial flows from the pre­vi­ous era of higher oil prices. No pierc­ing alarm has been sounded yet on the an­tic­i­pated re­trench­ment. Sim­i­larly, in ex­pec­ta­tion of froth be­ing re­moved from real es­tate mar­kets, an­a­lysts are talk­ing down the spec­u­la­tive, in­vest­ment di­men­sion of prop­erty's re­bound and talk­ing up the po­si­tion­ing and share of the end-user com­po­nent, another ac­knowl­edge­ment of the 'real' ver­sus 'fi­nan­cial' el­e­ments of mar­ket ten­den­cies.

So con­cern­ing are the fun­da­men­tally weak struc­tural cir­cum­stances of world growth - plainly de­pen­dent on re­peated doses of cycli­cally-re­lated stim­u­lus - that bond mar­kets in fact have di­verged from stocks again, on both safe-haven and low-in­fla­tion grounds, in­clud­ing across the Mena re­gional space. That said, suc­cess sto­ries may still be found as rel­a­tive oases of mo­men­tum amid any de­vel­op­ing sense of gloom. It will cer­tainly be in­ter­est­ing to note, for in­stance, how Emi­rates NBD/Markit's re­cently-in­tro­duced mea­sure of Dubai's per­for­mance pro­gresses, its key in­dex hav­ing ini­tially shown quite a sharp re­treat last month com­pared with the past five-year climb, yet still in­di­cat­ing ex­pan­sion.

Like­wise, whether the UAE ex­changes can sep­a­rate them­selves from an over­all per­cep­tion of the GCC as es­sen­tially an emerg­ing or fron­tier mar­ket play hing­ing on the oil­price out­look. One re­search house has al­ready drawn a dis­tinc­tion be­tween the dif­fer­ing strains of bud­get pol­icy be­ing pur­sued by the neigh­bour­ing states.

In that re­gard, there is a plau­si­ble ten­sion an­a­lyt­i­cally be­tween try­ing to dif­fer­en­ti­ate one coun­try's own nar­ra­tive, as dis­pensed to fund and wealth man­agers around the world, while hav­ing si­mul­ta­ne­ously to pur­sue in­te­grated so­lu­tions within the Gulf to tap into po­ten­tial economies of scale when ad­dress­ing the prob­lems con­fronting the re­gional econ­omy. Talks now to ex­plore har­mon­is­ing plans for VAT ev­i­dently be­long in that bracket.

Much to play for, then, for pol­i­cy­mak­ers and in­vestors alike as we move into the next phase of the post-cri­sis world, hop­ing that the var­i­ous signs of slow­down and sys­temic strains don't ac­tu­ally sig­nify another pre-cri­sis mael­strom in the mak­ing. Doubts over the Chi­nese econ­omy were height­ened by the re­cent, de­lib­er­ate de­pre­ci­a­tion (ef­fec­tively de­val­u­a­tion) of the yuan ren­minbi, as if to re­claim ex­port com­pet­i­tive­ness, threat­en­ing a trade and cur­rency spi­ral else­where. The Asian gi­ant's stran­gle­hold on in­ter­na­tional sen­ti­ment ap­pears to be tight­en­ing.

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